Additional Bonus
A bonus that may be added when your product is cashed in.
Adviser
An adviser, authorised by the Personal Investment Authority who looks at your circumstances and advises you on suitable products for your financial needs. An adviser can either be 'tied' to one company, or be independent.
Annuity
A regular income for a fixed number of years, or for the rest of your life, produced by investing a lump sum. A personal pension comes from buying an annuity (which must use at least 75% of your pension fund) when you retire.
APR
Annual Percentage Rate. A rate of interest used by all lenders. This means you can compare the cost of different loans on the market. When quoted with a mortgage, it takes account of the set up and continuing costs of the mortgage amongst other things.
Base Rate
The minimum cost of borrowing money set by National Banks.
Bonus
A sum added to the value of your with-profits product.
Charges
There are many different ways in which companies can charge for financial services. These include:
- Allocation rate.
Taking initial charges into account before investing your payment. The allocation rate is the percentage of your payment that is actually invested.
- Annual management fee.
Charging an amount every year – usually a percentage of the sum you have invested – for running your fund.
- Bid/Offer Spread
The price at which you can buy units (offer price) in a unit trust is usually higher than the price at which you can sell (bid price) them. The charge to you is the difference between the price at which you buy and sell.
- Commission
A charge included in the amount you pay or receive, when you buy or sell through a middle man such as an Independent Financial Adviser or a broker. Commission is also paid by some companies to the adviser or salesperson who advises you to buy a financial product.
Company representative
A financial adviser who can only advise on his or her company's products.
Contracting out (of SERPS)
Paying your National Insurance Contributions into a pension scheme other than the State Earnings Related Pension Scheme (SERPS).
Conveyancing
The legal aspects of buying and selling title to land and property.
Critical illness cover
If you are diagnosed with any one of certain severe illnesses (specified in the insurance policy), this cover will pay you a fixed amount – usually as a lump sum.
Daily Bonus
A regular bonus that is added each day.
Decreasing term
Some life insurance policies are for a fixed length of time (term), and pay you a fixed lump sum if you die during that time. With a Decreasing Term policy, the amount paid out reduces during the term. So the earlier in the term you die, the larger the amount paid to your dependants. This is often used as mortgage cover.
Disclosure of costs
An investment company is legally required to tell you the total cost of taking out a product or policy with them, including any commission paid to an adviser.
Discounted mortgage rate
A guaranteed reduction in the standard variable rate of interest charged on a mortgage. The reduction lasts for a set time, then returns to the standard variable rate. Sometimes this type of deal also involves paying a penalty if the mortgage is redeemed (paid off) during or at the end of the discounted period or for a given period of time after.
Endowment
An endowment policy is a life assurance policy which also helps you save. It pays you a fixed amount, plus any bonuses that may have been added, on a set date or if you die before that date. Endowments linked to mortgages are used to pay off an interest-only mortgage at the end of its term, but they cannot guarantee to do this.
Final salary schemes
A type of pension scheme run by employers. The amount you receive on retirement depends on how long you have worked for the company and how much you are earning just before you retire.
Financial Services Authority (FSA)
A Government body which will protect investors by regulating all investment businesses in the UK. The FSA took over from the Personal Investment Authority and other regulators in 2000 when the Financial Services and Markets Bill was enacted.
Fixed rate
A set rate of interest charged on a mortgage or other loan. At the start of a loan it is normally set just below the lender's usual rate and guaranteed for a certain length of time. Whether the usual rate falls below or rises above the fixed rate, you will still have to pay the same amount – so you could lose, or gain. At the end of the guarantee period, you will start paying the lender's usual rate. Sometimes this type of deal also involves paying a penalty if the mortgage or loan is redeemed (paid off) during or at the end of the discounted period.
Flexible mortgage
A mortgage which allows you to change the amount you pay each month, or how often you pay (subject to certain restrictions).
Freehold (England and Wales)
A freehold property is owned forever. A leasehold property is normally owned for a number of years, usually 99 or 999.
Free standing additional voluntary contributions (FSAVC)
If you are in your employer's pension scheme, you may be able to build up a bigger pension by paying extra amounts into a separate, independent scheme which is known as an FSAVC. However, you will usually be better off if you make additional contributions to your employer's company pension scheme if you can.
Fund Manager
A fund manager invests money which people have paid into, for example, unit trusts and investment trusts. The fund manager is paid out of the charges made, so the charges you pay will be higher for a fund which is actively managed than for one (such as an index tracker) which is not – though the returns may be higher, too.
General Business
General insurance, includes home and contents, motor, travel and business.
Guaranteed growth bonds
Invest a lump sum for a fixed term (usually 3-5 years) in a guaranteed growth bond, and you will be guaranteed a minimum return.
Guaranteed income bonds
Invest a lump sum for a fixed term (usually 3-5 years) in a guaranteed income bond and you will be guaranteed an income of a specified amount for the length of the term.
Illustration
This shows you an estimate of what you might expect to get back from an investment. It is worked out based on standard growth rates, and includes any charges you have to pay. The amount you actually get back may be higher or lower than the illustration.
Income tax
The tax you pay on your income each year. You pay income tax on your salary and on any interest or dividends on savings and investments. The amount of tax you pay depends on the amount of money you earn and receive from your investments and savings and on your tax allowances.
Individual savings account (ISA)
Put your savings into an ISA and they will be invested either in cash, equities (bonds, gilts and shares), life insurance policies or any combination of these. You do not pay tax on the income from an ISA, or on any money you may make when you sell it. There are limits on the amount you can invest in ISAs in each tax year.
Inflation
A rise in the price of goods and services. Inflation means that the same amount of money will be worth less, in buying terms, in the future than it is today.
Instant access
A savings account that you can draw your money out of at any time, without giving the bank or building society any warning (notice), and without being penalised by losing interest.
Interest only method
There are two ways to pay off a mortgage: interest only and repayment. With the interest only method, your monthly payments pay off only the interest you owe on the amount borrowed. At the end of your mortgage term you will need to pay off the actual amount you borrowed, which most people plan for by using an ISA, pension or endowment. With a repayment mortgage you repay part of the money you have borrowed each month together with interest. At the end of the mortgage term you will have repaid the money you borrowed.
Investment Management Regulatory Organisation (IMRO)
The regulator responsible for the ways in which companies invest money. Now replaced by Financial Services Authority FSA.
Land Register
A record of the registered owner of land, and of whether or not there are any mortgages or other conditions (restrictions on use, shared drives etc) affecting it .The record is held by the Land Registry.
Leasehold
Leasehold property is owned for a number of years, usually 99 or 999. Leases are normally used for flats.
Level term insurance
The simplest type of life insurance. If you die during the time you are covered, it pays out money to your dependants.
Life insurance
An insurance policy that pays a fixed amount of money if you die during the time it covers.
Low cost endowment
A way of saving, which includes life assurance. It pays out at the end of a fixed term, and also if you die during the term. It is usually used to pay off an interest only mortgage (see above) but doesn't guarantee to pay it off.
MIRAS (Mortgage Interest Relief at Source)
Tax relief on your mortgage. MIRAS ended in April 2000.
Money purchase scheme
A type of pension scheme run by some employers. Your payments are used to buy other investments. The size of your pension when you retire depends on the amount you've paid in, how much the investments have grown, and interest rates when you retire.
Mortgage
A loan commonly used to buy a house. The house is used as security until you've paid off the loan (usually after a fixed length of time). There are three main types of mortgage:
Repayment – you make payments, usually monthly, which go towards paying off both the capital (the amount you borrowed) and the interest. At the end of the agreed length of time, you will have paid off the whole of the loan.
Interest only – you pay only the interest on your mortgage. You make arrangements to pay the capital at the end of the agreed length of the mortgage. Endowment policies, ISAs or pensions can be used to repay the capital.
Flexible – you can repay more capital when you want to, and can take a break from payments for an agreed length of time.
Mortgage deed
The legal document you sign giving the lender the legal right to use your property as security for a loan.
Mortgage Indemnity Premium (MIP)
A premium paid for insurance to cover the lender in case your property is repossessed and sold and the lender cannot get their money back from the sale proceeds. It does not give you cover.
National Insurance Contributions
Effectively a tax which you pay as you earn. It's used to help fund the Social Security system including the State Pension and Unemployment Benefits.
National Savings
A range of savings products sold by the Government. You can usually buy them at Post Offices.
Net Interest
Interest received from a bank or building society account after basic rate tax has been taken off. Higher rate taxpayers have to pay more tax.
Occupational pension
A pension scheme set up by an employer for employees. It usually provides life insurance as well as pension benefits. The pension it pays out is usually based on a proportion of the employee's final salary, or on the amount paid in. There are two kinds of occupational pension: contributory (employees pay into the pension fund as well as their employer) or non-contributory (only the employer pays into the fund).
Permanent Health Insurance
Insurance which pays you an income if you become ill for a long period or become disabled and can't work.
Personal Equity Plan (PEP)
A tax efficient way of saving which was replaced by the ISA in April 1999. If you already have a PEP, you cannot invest new money into it, but you can continue to hold it, or transfer it to a new provider.
Personal Investment Authority (PIA)
The industry regulator which was replaced by the FSA (see above).
Personal pension
A tax efficient way to save for your retirement. When you retire you get a fixed lump sum, of which at least 75% has to be used to buy an annuity to give you an income for the rest of your life.
Private medical insurance
A policy which will pay for some or all of the cost of private medical treatment, as long as the condition is covered by the policy.
Quotation
A document showing you the cost of insurance cover at a particular company.
Redemption penalties
If you decide to change your lender (perhaps your mortgage lender) within a set time period, you may have to pay a penalty. For example, if you have a discount rate mortgage and move it at the end of the discount rate period, you may be charged a penalty.
Remortgage
If you change your mortgage lender but keep the same house under mortgage, you have remortgaged.
Renewable term insurance
Life insurance which pays out if you die during the time you are covered. If you want to, you can renew the cover at the end of the term, usually without proof of good health.
Repayment (Capital & Interest) method
There are two ways to pay off a mortgage: repayment or interest only (see above). With the repayment method, your monthly payments pay off the interest you owe and also some of the amount you have borrowed. At the end of your mortgage term, you will have paid off the interest and the amount you borrowed, in full.
Repossession
If a borrower doesn't pay back their loan as agreed, the lender can take legal ownership of the borrower's property and sell it to repay the loan. The proceeds of the sale do not always equal the outstanding loan.
Reversionary Bonus
A regular bonus that is added each year.
Securities & Investment Board (SIB)
An organisation which supervises other rule-making and professional bodies, such as The Law Society. It is directly responsible to the Chancellor of the Exchequer. Now replaced by the Financial Services Authority (FSA).
SERPS (State Earnings Related Pension Scheme)
If you're employed, some of your National Insurance contributions go towards SERPS. This is an earnings related pension which is paid to you when you retire, on top of your basic state pension. If you decide to 'contract out' of SERPS, the Government will pay the money you would have contributed, into a personal pension of your choice.
Stakeholder pension
A new personal pension to be introduced by the Government in April 2001.
State pension
This is paid to everyone. How much you will get depends on how much you have paid or have been credited in National Insurance contributions by the time you retire.
Stamp duty
The tax a buyer pays on the value of the property they're buying if it costs over £60,000.
Surrender
To cancel an investment or policy. If you cancel an investment or policy, you will usually get less money back (the 'surrender value') than if you kept it until the end of the agreed term. This is because earlier in the term more of the money goes in charges.
Tax credit
Until April 2004, an ISA or PEP fund manager can claim a 10% tax credit attaching to UK share dividends from the Inland Revenue. After this date, tax credit will no longer be available.
Term
The length of time during which a policy runs, or, in the case of a mortgage, the period by the end of which you must have repaid your borrowings (e.g. a mortgage).
Terminal Bonus
A bonus that may be added when your product is cashed in
TESSA
A savings account, in which the interest is paid to you tax free. Since April 1999, no new TESSAs have been available, but when an existing TESSA matures (reaches the end of its term), the money can be paid into a TESSA-only ISA.
Underwriting
Working out how likely it is that you will make a claim on an insurance policy, based on information such as your age, sex and health. When this has been decided, the underwriters can decide how much your insurance premiums should be.
Valuation
A professional inspection of a property to decide how much it is worth.
Variable rate
An interest rate that can move up or down at any time usually when there are movements in the Bank of England Base Rate.
Whole of life
Life assurance that you pay premiums into for the whole of your life, and which pays out whenever you die. Because it also builds up a cash value, it can be used as an investment by your beneficiaries.
With profits
A type of life insurance policy, which gives you a share of the profits of a life fund, as well as giving you life insurance cover. Premiums are higher than for a straightforward life insurance policy.
With profits endowment
A type of investment which lasts for a fixed period of time, and includes life insurance protection. The sum insured is guaranteed and also increased by bonuses, based on a share of the profits of the life fund.
